Merri and I just returned from London. Here are some thoughts on how to create profits that were sparked by this trip.
Dear International Friend,
The oily rattle of a diesel engine rose over the whine of wet tires on pavement. We jumped in the cab and waved once more to the girls. Merri and I had just spent a week enjoying London with our daughters, Francesca and Eleanor, and were headed back to Gatwick Airport. Having lived here for a decade, London is a second home so we spent the week not only taking in theater and great restaurants, but also walking the girls down memory lane.
In the process of enjoying this great city several points made themselves clear. The first point is how high taxes can go. Politicians have pushed prices of some goods here to incredible heights. Gas for example is over $4 a gallon. Cigarettes (a disgusting habit, but look at the cost) are over $6 for a pack of twenty! And the country has a high income tax as well.
Another point that was brought home again is how high real estate prices can rise. I have made a fair amount of money over the years buying and selling London real estate, but I saw that I would have made more had I held on. Decent houses in central London are easily in the million dollar range.
Yet in retrospect many of my best profits (and losses) have come from distortions in currencies and property prices. This point is important now because two distortions have come together to create some excellent opportunity. See why below!
Earlier in 1970 I had also lived in London, England for a year, then moved to Hong Kong. During that time I also maintained a home outside of San Francisco, California.
This was a time of great inflation. My homes in California and in Hong Kong appreciated greatly. In 1976, when I moved from Hong Kong back to London, I noticed that London real estate was priced about the same as it had been in 1970. This puzzled me. Why had London property prices remained flat despite inflation?
On investigation, I learned that there had been a huge real estate crash in 1970 which continued to dampen real estate prices six years later despite the rampant global inflation. I felt this was a great distortion as European property prices had risen, but London prices had not. Yet London offered the best utility as the center of the English speaking world. This, to my way of thinking, created a huge distortion.
Then the British pound collapsed from two dollars per pound to its lowest level ever (a pound per dollar for a short time) so the distortion widened. This meant in US dollar terms London property had dropped almost 50% while property in other major cities of the western world had increased in price by three or four times. I bought a house in West London paying 34,000 pounds, 9,000 pounds down (then $9,000) and took a mortgage for 25,000 pounds ($25,000). I lived in the house and three years later the pound had recovered to 2.2 dollars per pound plus London real estate had caught up with property in other major western centers. I sold the house for115,000 pounds or $253,000 a profit of $244,000 on a $9,000 investment.
Perhaps my most important overseas property was a $100,000 investment in health and a better world, by buying just under 800 acres in the Andes. Merri and I still own this land and the financial returnhas had nothing to do with money though I suspect it is worth more than what I paid. This is a beautiful site with incredible views, five white horse tail waterfalls flicking off black rock and spraying over verdant forest scenery, layer after layer of jagged mountains sliding into a horizon where mists lay over valleys in a kaleidoscope of grey and green that pours into rushing streams below. Here we allow a community of Incan shamanic apprentices to stay. Living with them and learning their way of life has been one of the best investments for our bodies and souls, plus allowing them to use this sacred place has helped the indigenous community in many ways. The return to us in beauty, good health and feeling good about helping others goes way beyond any monetary return we could receive.The importance of helping the poor and of keeping ourselves in good health has never been so highlighted as in the past few months of the terrorist attacks.
Any time I have failed to take advantage of such distortions I have kicked myself later! In the 1980s I began taking real estate buying tours to the Isle of Man when there was another distortion. Isle of Man overseas companies did exactly the same thing as Jersey and Guernsey structures, but cost less than half. This led me to believe that the Isle of Man would increase in popularity as a financial center. While visiting I discovered that a long depression had forced over 2,000 properties onto the Island real estate market (population was only 60,0000). We rented a 130 acre farm with almost a mile of ocean front and a wonderful white washed, thick walled four bedroom farm house that was for sale. We loved the ocean views from the living room and kitchen, felt cozy sitting by the roaring fire and enjoyed taking the kids for long walks along the rugged coastal scene. The owners were asking 55,000 pounds (about $82,5000) and we offered 50,000 pounds ($75,000). They would not budge down and I was not motivated enough to go higher. The Isle of Man did boom and I heard recently that farm sold not long ago for a million pounds (1.5 million dollars).
This is why I have been zeroing in on Ecuador real estate. Several facts are exciting. The first is the fact that one sixth of the U.S. population now lives in a county that abuts either the Atlantic or Gulf Coast. This has been the largest, richest migration in the history of mankind and the crowds along the U.S. coast create many severe social problems. Plus prices for such land has risen dramatically.
Second, there is a huge movement of people into warmer, sunny parts of the U.S. which places enormous strain on resources, water, airquality etc. Prices in these areas are rising as well.
Just 3 hours and 45 minutes from Miami (a little more from Houston) Ecuador is the only source of direct sunlight 365 days a year and has miles and miles of empty beaches on the Pacific coast and millions of acres of spring like weather in the Andes. Prices are a fraction of what one pays in the U.S.
For example just this week I was offered three pieces of land by real estate broker, Jorge Loor, (email@example.com). One propertyis a beach front lot for $5,000 in a National Park that backs up to a fresh water river as it reaches the Pacific. A similar lot where I sold my last house in the U.S. (Naples Florida) would cost millions. Now that is a distortion!
The second property offered to me this week is a house on a beachfront property in a National Park for $15,000; 3 bed room, kitchen, living room, big balcony one complete bathroom. It's all made of wood and can be improved beautifully for around $1,500
The third is a 2.2 acre beach front property in the village of Crucita for $55,000 that is adjacent to the house of the Vice-president of Ecuador and is zoned for development or residential.
What makes this more exciting is the fact that we can currently borrow weak yen at less than 2% per annum. This means that a $5,000 property (such as the beach front lot above) can be purchased for as little as 8.33 a month.
Sound outrageous? It's not. Readers and I have been doing this for thirty years. Opportunity still exists.
Falling currencies have made money for me and my readers more than once. My clients cashed in when I spotted both a real estate and currency distortion in London many years ago.
While living in London and being aware of the falling pound I noticed that Lloyds Bank, one of the big London banks was issuing a new executive gold card which included an unsecured 7,500 pound line of credit.
I recommended getting these credit cards, borrowing the 7,500 pounds and converting them into a hard currency for investment into undervalued London property. Those who took that advice profited nicely. The pound fell from $2.20 per pound to US $1.40 per pound. When they took the loan, they were able to convert the pounds into dollars at US $2.20 rate and obtain US $16,500. When the pound reached $1.40 per pound, it took only $10,500 to buy the 7,500 pounds required to pay off the loan. Those investors made a quick 60% before they even made an investment! Thus they earned a return on their dollar investment plus made a huge foreign exchange gain, plus gained huge profits on the real estate they bought.
There are several lessons we can learn from this:
- Lesson #1: Fortunes can be made just because of currency moves. In this real example, investors made 60% on the money they had at risk in just over a year, from just the currency move!
- Lesson #2: Timing is of utmost importance. In this study, investors borrowed their loans at almost exactly the right time. Had they borrowed a year earlier they would have waited much longer to make a profit. Had they borrowed later they would not have made a profit at all.
- Lesson #3: Great losses can occur because of currency moves. Any investor who borrowed pounds and converted them to dollars a year later suffered a loss. After the pound reached a low in the US $1.40 range, it then strengthened back to US 1.90 and maintained that strength for several years. An investor who borrowed pounds and converted to dollars at the 1.40 rate received $10,500. $10,500 converted at the$1.90 rate would create only 5,526 pounds, a loss of 1,974 pounds or a loss just from currency moves of about 26%.
- Lesson #4: Borrowing can leverage profits or losses from currency moves. In the case study, investors made as much as 60% (or could have made a 26% loss) only on borrowed money at risk. They did not have to invest their own cash.
- Lesson #5: Interest rates are crucial to the way a currency will move. The investors in this case study paid higher interest for the pound than they could earn on the dollars they obtained from the conversion. Generally the weaker a currency is, the higher its interest rate will be. However, if a currency is oversold, the higher its interest rate goes, the stronger the currency will eventually become.
- Lesson #6: When currency and real estate prices are distorted together profits potential becomes almost phenomenal.
- Lesson #7: When currency, interest and real estate prices are all three distorted, the deals become almost unbelievable. Now that you have reviewed this you can see why you can buy a lot on the beach for as little as $8.33 per month.
This is why I am conducing three courses in Ecuador this winter and have invited Thomas Fischer of JyskeBank (www.jbpb.com) to speak at our January course on how to borrowyen at such low rates, plus have invited several real estate brokersincluding Jorge Loor to meet the delegates there. We will helpdelegates arrange trips to look at real estate after the course as well.
I hope to see you there. Until next message, good global investing and business.